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Subsidiaries and Equity Investments, Comptroller's Licensing Manual

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Subsidiaries and Equity Investments, Comptroller's Licensing Manual Office of the Comptroller of the Currency Washington, DC 20219 COMPTROLLER’S LICENSING MANUAL Subsidiaries and Equity Investments January 2019 Contents Introduction ..............................................................................................................................1 Key Policies ...............................................................................................................................2 Common Types of Subsidiaries and Equity Investments ............................................. 2 Examination and Supervision ....................................................................................... 4 Offshore Subsidiaries .................................................................................................... 5 Undercapitalized Banks ................................................................................................ 6 Application Process ..................................................................................................................7 Provisions Applicable to Subsidiary and Equity Filings Generally.............................. 7 Operating Subsidiaries—National Bank and FSA ........................................................ 9 Operating Subsidiaries—National Bank ..................................................................... 10 Operating Subsidiaries—FSA ..................................................................................... 14 Service Corporations—FSA ....................................................................................... 16 Redesignation—FSA .................................................................................................. 18 Bank Service Company—National Bank and FSA .................................................... 19 Financial Subsidiaries—National Bank ...................................................................... 20 Equity Investments—National Bank .......................................................................... 24 Non-Controlling Equity Investments—National Bank ............................................... 26 Pass-Through Investments—FSA ............................................................................... 27 Other Equity Investments—FSA ................................................................................ 29 Appendix A: Operating Subsidiary Guidelines—National Banks ....................................30 Introduction ................................................................................................................. 30 Operating Subsidiary Activities—National Banks [5.34(e)(5)(v)] ............................. 30 Appendix B: Non-Controlling Investment Guidelines—National Banks .........................64 Introduction ................................................................................................................. 64 Non-Controlling Investment Activities....................................................................... 64 Appendix C: Operating Subsidiary Guidelines—FSAs .....................................................76 Introduction ................................................................................................................. 76 Operating Subsidiary Activities—FSAs [12 CFR 5.38(e)(5)(v)] ............................... 76 Appendix D: Service Corporation Guidelines—FSAs .......................................................87 Introduction ................................................................................................................. 87 Service Corporation Activities—FSAs [12 CFR 5.59(f)] ........................................... 87 Appendix E: Pass-Through Investments Guidelines—FSAs .............................................93 Glossary ..................................................................................................................................95 Abbreviations .........................................................................................................................97 References ...............................................................................................................................98 Table of Updates Since Publication ....................................................................................103 Comptroller’s Licensing Manual i Subsidiaries and Equity Investments Introduction National banks and federal savings associations (FSA) develop, and offer through various subsidiaries and other business entities, a wide range of products and services designed to increase profitability, improve service to customers, and respond to technological innovations and competition. For national banks, these entities include operating subsidiaries, financial subsidiaries, and bank service companies. For FSAs, these include operating subsidiaries, service corporations, and bank service companies. Banks may also make equity investments in other business entities that perform bank-permissible activities. National banks may make these investments through their other equity investment authority, and FSAs may do so through their pass-through investment authority. Throughout this booklet, national banks and FSAs are referred to collectively as banks or bank, except when it is necessary to distinguish between the two. This booklet • describes the various types of subsidiaries and other business entities that banks may establish or acquire and the activities in which such entities may engage. • describes the various equity investments that banks can make. • provides detailed guidance on permissible and incidental activities1 and conditions for establishing and operating these entities or investments. • provides information on the statutory and regulatory factors that the Office of the Comptroller of the Currency (OCC) considers when reviewing and processing applications or notices. • provides guidance on specific requirements for insurance, electronic, and fiduciary activities. This booklet provides a glossary and hyperlinks to filing samples and other booklets in the Comptroller’s Licensing Manual, as well as other information applicants may use in order to file to establish various subsidiaries or make an equity investment. 1 Appendixes A and B set out precedent for national banks. Appendixes C, D, and E set out precedents for FSAs. Permissible activities for national banks and FSAs can differ because the statutory and regulatory frameworks authorizing and implementing activities for these institutions are different. Comptroller’s Licensing Manual 1 Subsidiaries and Equity Investments Key Policies Key Policies Common Types of Subsidiaries and Equity Investments Operating Subsidiaries Banks may establish or acquire operating subsidiaries. Operating subsidiaries may only conduct activities that the parent bank may conduct. Operating subsidiaries in which banks may invest include corporations, limited liability companies (LLC), limited partnerships, and similar entities if all of the following conditions apply: • The bank has the ability to control the management and operations of the subsidiary, and no other person or entity exercises effective operating control over the subsidiary or has the ability to influence the subsidiary’s operations to an extent equal to or greater than that of the bank. • The parent bank owns and controls more than 50 percent of the voting (or similar type of controlling) interest of the operating subsidiary, or the parent bank otherwise controls the operating subsidiary, and no party controls a percentage of the voting (or similar) interest of the operating subsidiary greater than the bank’s interest. • The operating subsidiary is consolidated with the bank under U.S. generally accepted accounting principles (GAAP). The OCC may, at any time, limit a bank’s investment in an operating subsidiary or may limit or refuse to permit any activities in an operating subsidiary for supervisory, legal, or safety and soundness reasons. To establish or acquire an operating subsidiary, or to engage in an additional activity in an existing operating subsidiary, a national bank generally must file with the OCC an application or an after-the-fact notice. An FSA generally must file an application or a notice; the after-the-fact notice procedure is not available to FSAs. Service Corporations FSAs may establish or acquire service corporations pursuant to 12 USC 1464(c)(4)(B). A service corporation may be organized as a corporation, or may be organized in any other form that provides the same protections as the corporate form of organization, including limited liability. An FSA need not have any minimum percentage ownership interest or have control of a service corporation to designate an entity as a service corporation. Service corporations may engage in a broader range of activities than FSAs may conduct directly. The list of activities previously found permissible for service corporations is in 12 CFR 5.59(f). In addition, an FSA may request OCC approval for a service corporation to engage in any other activity reasonably related to the activities of financial institutions. An FSA’s aggregate investment in service corporations is limited, as described in the “Service Corporations—FSA” section of this booklet. There are also limitations regarding the state in Comptroller’s Licensing Manual 2 Subsidiaries and Equity Investments Key Policies which a first-tier service corporation may be located and regarding the entities that may invest in a first-tier service corporation. The OCC may, at any time, limit
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